Long-Run Volatility and Risk around Mergers and Acquisitions

Sreedhar T. Bharath

Arizona State University - W.P. Carey School of Business

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

March 14, 2005

AFA 2006 Boston Meetings Paper

In this paper, we study the changes in volatility and risk of acquirers around mergers and acquisitions (M&As) and seek to understand the determinants of those changes. We find that there is a strong run-up in volatility and risk beginning four years before the merger. This pre-merger run-up is consistent with the view that M&As are a response to industry shocks as documented by Mitchell and Mulherin (1996). We find that for a period of about one year after the merger the cross-sectional average of the volatility measures (total, systematic and idiosyncratic) continue to increase. Beyond one year the systematic volatility and beta begin to decline but idiosyncratic volatility does not. The post-merger volatility pattern is consistent with the notion that the risk of integration of the acquirer and the target firms gets resolved over time. Interestingly, there is no difference between the volatility patterns of intra and inter industry mergers. Our findings have important implications for understanding several issues, including the announcement wealth effect of mergers, changes in the diversification discount, and the long-run underperformance of acquirers in M&A transactions.

Keywords: Mergers and acquisitions, volatility, risk, diversification, long-run underperformance

JEL Classification: G12, G34

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Date posted: March 24, 2005  

Suggested Citation

Bharath, Sreedhar T. and Wu, Guojun, Long-Run Volatility and Risk around Mergers and Acquisitions (March 14, 2005). Available at SSRN: https://ssrn.com/abstract=686811

Contact Information

Sreedhar T. Bharath
Arizona State University - W.P. Carey School of Business ( email )
400 E. Lemon Street
Tempe, AZ 85287
United States
347-256-8784 (Phone)

Guojun Wu (Contact Author)
University of Houston ( email )
220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)
HOME PAGE: http://www.bauer.uh.edu/wu
China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030

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